Can Nissan Make It? Perhaps

Automotive Industries, Nov, 1999 by Maryann Keller

Last month's Tokyo Motor Show brought together the leaders of virtually every auto company in the world. But one man and the challenge he faces over-shadowed their presence.

Two days before the show opened to the press, Carlos Ghosn, Nissan's new French chief operating officer, laid out his restructuring plan for the debt-ridden Japanese company now effectively controlled by Renault. His announcement rocked tradition-laden Japan.

In an unheard-of move in a nation with lifetime employment, he announced the closure of three Nissan assembly plants by 2001 and two powertrain operations by 2002. He detailed a plan to reduce costs by $9.5 billion by 2003, much of it coming from price cuts he demanded from Nissan's keiretsu of parts suppliers.

Just over 21,000 people will be effected by the closings. Ghosn (pronounced goan) said attrition and transfers to other plants would handle these job losses, but politicians and auto industry executives didn't cut him any slack. They quickly criticized the plan for its expected impact on employment at Nissan and its parts suppliers.

Under the Ghosn plan, Nissan's parts supply network, once regarded as the foundation in low costs, will be dismantled and jobs could be lost. Unless the keiretsu parts companies are willing and able to reduce prices, Nissan will source work elsewhere. That's a gamble for Nissan because the suppliers bear much of the burden for research and development as well as engineering. But the greater risk would be to perpetuate a system that tolerated poor financial performance.

Amid the swirl of controversy, Ghosn closed his press conference with a short speech in his newly learned Japanese. Shifting away from the pain he was about to inflict on the company and its suppliers, he spoke about Nissan's renaissance, an advertising theme aimed at restoring consumer confidence in the brand and future products. The emphasis on product was the most important. Nissan lost it way in this area and must revive the passion. Cost cuts alone won't make any automaker successful.

Ghosn is delivering the right medicine in the proper dosage, but it may be too much for traditional Japan. The jubilation in Tokyo over the French rescue of the debt-ridden company is suddenly drying up, giving way to the realization that Renault really means to clean house. It doesn't have unlimited capital to pour into a business suffering from negative cash flow, a declining market share and restrictive business practices that resulted in Nissan's near bankruptcy.

Its problems were created during more than 20 years of mismanagement and a belief that things would simply just get better over time. Generations of executives failed to exercise the simplest financial discipline over the business while bankers willingly supported their ill-conceived investments and operating losses.

Consequently, Renault has no choice but to create a smaller, viable company no matter how loud the complaints about its tactics.

Taking Renault's money was easy; talking its medicine won't be. Ghosn's timetable and initiatives are necessary if Nissan is to get back on its feet, But his strategy is unnerving a nation still reluctant to confront problems of excess capacity and rigid employment systems. The challenges he faces both internally and externally will be instructive to any other foreign company contemplating a bailout

However, to look at the situation in monetary terms alone underestimates the magnitude of the difficulties he confronts. Japan has yet to develop economic policies that create jobs or foster a business environment that rewards entrepreneurs. That's far from the atmosphere that Ghosn needs to mm Nissan around.

His job won't be easy. The recent drop in the share prices of Renault and Nissan reflect investor pessimism that he can pull it off. Although the odds are stacked against him, I applaud the fact that Ghosn is willing to do what is in the best interests of the company.

Maryann Keller is president of auto services at Priceline.com.